E.U. environmental directive poses challenge for insurers

Some members of an insurance industry group laying the groundwork for environmental coverage under the new European Union environmental liability directive say it could be years before such products are widely available.

"I would be surprised if there was a competitive market in most member states by 2010," said Phil Bell, group casualty director for Royal & SunAlliance Insurance Group P.L.C. in London, and a member of the Paris-based Comite Europeen des Assurances' environmental expert working group.

E.U. member countries are required to transpose the Environmental Liability Directive into national law by next April. The directive aims to make businesses that damage the environment legally and financially accountable for the damage.

Under the directive, member states must encourage development of insurance or financial security products for environmental damage and report back to the European Commission by 2010.

To assist in the process, the CEA independently formed the environmental expert working group two years ago. The 11-member group--which includes environmental experts, insurers, and a risk manager--is expected to release its report by the year-end.

"We won't solve everything by the end of the year, so I have to lower a little bit the expectation," said Bernard Tettamanti, a member of the CEA group who also is deputy head casualty Americas and member of senior management at Swiss Reinsurance Co.

"It is not our task, for obvious reasons, to develop insurance products, but to develop cornerstones; to give some guidance on how to cope with the challenges the directive poses," he said.

Mr. Tettamanti said the group hopes its work can assist insurers in developing "sustainable products which will have a fair chance to be offered in the next couple of years."

The E.U. directive calls for restoring a polluted area to its "base line condition" prior to the damage.

However, other remediation requirements are posing a challenge for insurers. For instance, how insurers would quantify and underwrite so-called "complementary remediation," which is supporting habitat or wildlife in a new area when a damaged site cannot be restored, "is very tricky," said Pierre Sonigo, general secretary of the Brussels-based Federation of European Risk Management Assns. and a member of CEA's working group. "If a species has been completely destroyed, how can you replace it? So we are talking about other ways of compensating for that."

Also difficult is providing "compensatory remediation" in which a polluter must compensate for interim losses while damaged natural resources return to their baseline condition.

"None of the member states have come up with their defined formulas...for compensatory remediation; how they would actually look for that to be calculated," said David Simpson, vp, environmental insurance, in London for XL Insurance. "From an insurance perspective, it just provides uncertainty and a challenge for us to be able to calculate what the ultimate losses would be arising from that."

Currently in Europe, corporate property and casualty policies cover environmental damage, but only for sudden and accidental damage, experts said. Those policies do not cover past pollution, gradual pollution or first party clean-up.

For such coverage, companies need to turn to specialty environmental insurers such as XL Capital Ltd., American International Group Inc. and ACE Ltd.

"Typical insurance has a significant gap in coverage associated with the environmental liability, and the market to fill that gap is developing," said Karl Russek, senior vp, environmental risk, for the ACE European Group in London.